Haight Brown & Bonesteel, LLP A Legal Perspective on the Utilization of Independent Contractors and the Implications of Dynamex Presented by Michael C. Parme, Esq. Haight Brown & Bonesteel, LLP 1

Roadmap I. Who Is an Employee? II. The Dynamex Decision III.The Judicial Aftermath IV.Implications of Dynamex 2

What Is an “Employee”? The issue raised by Dynamex is whether an employer has properly classified an independent contractor or a non-employee. Dynamex sets out a new “ABC Test.” 3

-Wrongful Termination/ Discrimination -Labor Code - Wage Orders There are differing definitions of “Employee” based on what law is being applied. What law applies? - Federal tax law - IRS -EDD -Wrongful Termination/ Discrimination -Labor Code - Wage Orders 4

Burden of Proof Under all tests or definitions, there is a presumption of employment. The burden is on the employer to show there is a true independent contractor relationship. 5

IRS Test Common law analysis based on multiple factors (economic realities test). There are 20 factors that fall into three major categories: -behavioral control -financial control (pay, supply tools, etc.) -relationship of the parties (written contract?) 6

It’s an employee when… 1. Company has the right to direct and control how work is accomplished. 2. Does not market services or products to the general public or take a risk of profit or loss. 3. No written contract and work is core to the business. 7

EDD •Common law definition based on S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341. •Multifactor test. More factors (23). •Focus is on the right to control. 8

Right to Control •Who supplies worker’s tools and materials? •Who trains worker? •Determine hours of work? •Discharge at will without cause? •Who controls the manner in which the work is done? •Continuing relationship? •Who hires assistants? Not whether the company does control; it is whether company has the right to control. 9

Employment Claims Courts apply S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341. 1. Wrongful termination 2. Discrimination 3. Workers compensation 4. Labor Code violations 10

Wage Orders Wage Orders apply to laws governing minimum wage, overtime, meal periods, rest breaks, etc. Wage orders contain three different definitions of “employ” and “employer”: 1. To exercise control over the hours, wages, or working conditions; 2. To suffer or permit to work; or 3. To engage, thereby creating a common law employment relationship. #2 is broad and vague, originating during the era of child labor laws. Prior to Dynamex it was thought to be relevant to a joint employer situation under a case called Martinez. 11

Part II: Dynamex Basic Facts: Dynamex was in the business of same day delivery. The drivers for the company were classified as independent contractors. •Most drivers owned their vehicles •Drivers worked for a flat rate •Drivers carried their own insurance •Drivers set their own routes •Drivers set their own schedules •They could turn down assignments •They could work for other delivery services •Written IC agreements in place A driver sued under wage orders claiming misclassification and unfair business practices. It was a class action lawsuit. 12

Part II: Dynamex The Supreme Court held: 1. “To suffer or permit to work” is a valid statutory definition that applies outside the joint employer context. 2. The court created an ABC test to better define what “to suffer or permit to work” means. 3. The court applied this test and found Dynamex’s drivers are employees for purposes of the wage claims. 13

The ABC Test Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the putative employer proves: (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. 14

The ABC Test Note that each of these requirements need to be met in order for the presumption that a worker is an employee to be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor. Note that Part B of the test creates huge challenges for companies that rely on independent contractors, especially in the “Gig Economy” (i.e. Grubhub, Postmates, Uber, etc.) Marketing, creative, entertainment industries? 15

The ABC Test Shift from a multi-factor balancing / totality of the circumstances test to a test where the employer must prove ALL 3 ELEMENTS! 16

III: Judicial Aftermath We have had almost a year for lower courts to interpret Dynamex: There are at least three (3) major questions: 1. Is Dynamex limited to wage orders? 2. What is the current status of SG Borello? 3. Is it retroactive? 17

III: Judicial Aftermath Garcia v. Border Transportation Group (Oct. 2018): Dynamex’s ABC Test applies to wage order claims. Johnson v. VCG-IS, LLC et al. (Oct. 2018): Orange County Superior Court, Case No. 30-2015-00802813, the court confirmed that the Dynamex decision is retroactive. Duffey v. Tender Heart Home Care Agency, LLC (Jan. 2019): Extends Dynamex rationale to Labor Code violations (Domestic Worker Bill of Rights). It does not specifically apply the ABC Test. Presumably, Dynamex’s ABC Test remains confined to the wage order context of that case. 18

III: Practical Implications 1. Companies that use independent contractors should get legal advice as to how Dynamex applies to their business. 2. Workers that perform activity that would be non- exempt need to be integrated into the employee work force. 3. Workers who would be exempt, are not as much of a concern because wage orders wouldn’t apply (executive, administrative, or professional). 19

III: Practical Implications 4. The Legislature has a bill AB 5 (December 3, 2018) that would codify Dynamex as law and extend it to other applications beyond wage order claims. There is a competing bill AB 71 (amended February 25, 2019) that purports to restore the law to the pre-Dynamex multi-factor standard. 5. Expect industries to lobby for statutory exemptions. (Real estate, health care, entertainment, creatives, etc.) 20

III: Practical Implications 6. Significant implications for litigation that shift the burden of proof and impose a standard of “wholly irreconcilable” 7. Invention and Adaptation: Companies are going to restructure or change business practices to obviate the risk of liability and/or reduce their exposure. (I.e. Curry v. Equilon Enterprises, LLC (April 2018) Stands for the proposition that a third party “middle man” may limit company’s exposure.) 21

A Legal Perspective on the Utilization of Independent Contractors and the Implications of Dynamex Questions or Feedback? mparme@hbblaw.com 22